April 13, 1998

Jonathan G. Katz,

Secretary

Securities and Exchange Commission

Mail Stop 6-9

450 Fifth Street, NW, Washington, D.C. 20549.

RE: Publication or Submission of Quotations Without Specified Information

File No. S7-3-98

Release No. 34-39670; 17 CFR PART 240; RIN: 3235-AH40

Dear Mr. Katz:

This comment letter is submitted in response to the Commission=s recent proposal entitled APublication or Submission of Quotations Without Specified Information,@ File No. S7-3-98, Release No. 34-39670; 17 CFR PART 240; RIN: 3235-AH40.

The 15c2-11 proposals in S7-3-98 fail to distinguish between those Microcap securities in the over-the-counter market that are disreputable Penny Stocks, and those securities that are issued by quality, stable companies. As a result, the amendments have the potential to undermine a significant system of marketplace checks and balances that benefits the investing public and minority shareholders. The Commission should provide an exemption for the securities of family-controlled or closely-held businesses that have demonstrated histories of non-fraudulent operations. Alternatively, absent a carve out for the entities described above, the Commission must revise its proposals to avoid rewarding issuers that intentionally deprive the public of information necessary to maintain the integrity of the marketplace. The Commission might refer to Rule 3a51-1(g) [an issuer that has net tangible assets in excess of $2,000,000 if the issuer has been in continuous operation for at least three years, or $5,000,000 if the issuer has been in continuous operation for less than three years; or has average revenue of at least $6,000,000 for the last three years is not covered under the >34 Act=s definition of Penny Stock] and utilize its threshold as an exemptive test.

Microcap securities are generally thinly capitalized, are often not required to file periodic reports with the Commission, characterized by low share prices, garner little or no analyst coverage, and are usually quoted on the OTC Bulletin Board ("OTCBB") operated by the National Association of Securities Dealers, Inc. ("NASD") or in the Pink Sheets published by the National Quotation Bureau ("NQB"). However, not all securities traded on the OTCBB or quoted by NQB are tainted by fraud, and certainly not all fall within the conventional definition of Penny Stocks.

The January 1998 issue of the Family Business Advisor listed the ten largest family businesses by 1997 sales: Cargill ($56 billion); Koch Industries ($30 billion); Continental Grain ($16 billion); Mars ($14.5 billion); Publix Super Markets ($10.4 billion); Bechtel Group ($8.2 billion); Meijer ($7.2 billion); Levi Strauss & Co. ($7.1 billion); H E Butt Grocery ($6.5 billion) and Amway ($5.8 billion). Clearly none of these companies fall within the traditional view of the mom-and-pop family business; and certainly, none of the companies listed above fall within the accepted norm of a Microcap, let alone a Penny Stock.

We must be careful to distinguish between Penny Stocks and issuers traditionally defined as family-owned, closely-held, or privately-held (family-owned, closely-held, or privately-held companies hereinafter collectively referred to as Atightly controlled entities@), because the latter group is not necessarily a sub-set of the former. Additionally, when a tightly controlled entity does fall within the purview of a Microcap, it does not necessarily mean that such an entity is a short-lived, fraudulent enterprise designed to attract unwitting investors. Tightly controlled entities may well have operating histories measured in generations, if not in excess of a century. They very often evidence a reputation for excellence and integrity, and usually place among the leaders within their particular market segment.

It is not unusual to find that successful tightly controlled entities have relatively few shareholders (under the reporting threshold of 500) and that a core group of such shareholders serve in the dual role of management. In such cases, the role of management and shareholders is so intertwined as to virtually render the separation invisible. Similarly, the actions of management on behalf of themselves as shareholders virtually negates the notions of the corporate entity as something distinct and separate from the personal needs and desires of its component shareholders. In an effort to accomplish its goals, a tightly controlled entity often imposes Buy-Sell restrictions on the transferability of the company=s shares. Majority shareholders normally seek to avoid any free transferability of shares and, accordingly, impose strict controls to restrict outsiders from coming in or shares from being transferred out. It is not uncommon for substantially all transactions of a tightly controlled entity=s securities to have been among the company, its employees, former employees, their families and various benefit plans established for the company's employees. Further, the market price of the company's securities is frequently determined by the Board of Directors based upon appraisals prepared by an independent appraiser.

Whenever the shares of a tightly controlled entity are transferred, their fair valuation is often problematic. Minority investors are more vulnerable than their counterparts in public companies, and often subjected to what has become known as a Acash-out@ or a Afreeze-out.@. Given that the vast majority of tightly controlled entities do not meet the standards for listing on the Exchanges or NASDAQ, the sole recourse for any market valuation is often a much-criticized attempt to derive fair valuation from so-called majority-imposed valuation formulas or benchmarks.

Many tightly controlled entities refuse to provide financials to non-shareholders, and will often resort to a restrictive and dilatory process when shareholders request financials. It is not uncommon to find such entities refusing to provide anything more substantive than a less-than-current annual report. To this extent, Penny Stocks and tightly controlled entities have one thing in common: without information, it is difficult for investors, securities professionals, and others to evaluate the risks presented by their securities.

Let us consider some comparisons between Penny Stocks and tightly controlled entities. Investors frequently fall prey to persons who make false representations and unrealistic predictions about Penny Stocks. The assets of Penny Stocks are usually limited and frequently subject to inflated assessments in the form of goodwill or some questionable options or rights in some even more questionable venture. In contradistinction, tightly controlled entities often have significant tangible assets with a substantial allocation in cash. Similarly, the level of debt, especially long-term, is usually within excellent limits at the tightly controlled entity. Another common hallmark of Penny Stocks is the issuance of additional shares, virtually as if rabbits pulled from a magician=s hat, but tightly controlled entities view such a practice as anathema. In comparing the histories of these two types of issuers, we would immediately be struck by the infrequency and limited nature of issuance of shares by the tightly controlled entities. Additionally, under Rule 3a51-1(g) an issuer that has net tangible assets in excess of $2,000,000 if the issuer has been in continuous operation for at least three years, or $5,000,000 if the issuer has been in continuous operation for less than three years; or has average revenue of at least $6,000,000 for the last three years is not covered under the >34 Act=s definition of Penny Stock. Similarly, under Section 12(g) and the attendant Rule 12g of the >34 Act, reporting requirements are only triggered when there is a combination of $10,000,000 in assets and 500 or more shareholders.

Penny Stocks are more often than not engaged in the business of touting their stock, rather than their company=s services or products. Tightly controlled entities, to the contrary, avoid public relations hype of their stock and generally take great pride in maintaining the cachet that had taken generations to build. As a natural offshoot of these divergent approaches, the traditional Penny Stock shareholder is, to use the industry argot, an Aaccount opener,@ whereas the traditional tightly controlled entity=s shareholder is either a family member, employee, or a sophisticated institutional/private investor.

Try as they might, tightly controlled entities occasionally find their securities falling into the hands of outsiders. The desired outcome is for shares to be transferred upon the shareholder=s retirement or death to an employee or family member, but sometimes, absent a ready, willing, and able buyer, shares wind up in the hands of an outsider; in some instances shares have remained in the hands of an outsider following efforts at privatization. For reasons peculiar to tightly held entities, they view the market making community with suspicion and, at times, outright hostility. The sine qua non of the tightly held entity is its desire to remain such.

Clearly, independent broker-dealers quoting independent markets perform a public service. In the case of the tightly controlled entities, the independent broker-dealer serves a valuable function as the last-best-hope for a minority shareholder or a suitor. Given the sparsity of public information on a tightly controlled entity, that entity=s own strong desire to keep outsiders from coming in, and the existing shareholders= desires (for tax advantages) to artificially depress the market value for their securities, it is unfriendly territory for an independent broker-dealer to be quoting an independent market in such securities. That broker-dealer is viewed as an interloper whose only perceived purpose is to provide a higher priced alternative to the company=s often artificially depressed valuation. Similarly, the mere existence of a ready market for such shares serves to undermine the entity=s ability to strictly enforce its artificial valuations.

The result of the Commission=s proposal is that tightly controlled entities will either persist in their tradition of non-disclosure, thereby eradicating any independent market for their securities, or those entities will attempt to hand pick broker-dealers, not for the purpose of quoting fair markets, but for the purpose of enforcing accommodating markets through which they can vacuum up any and all open-market shares.

In light of the Commission=s proposal to eradicate piggybacking, the independent broker-dealers will be unable to publish their quotes. Clearly, the likely result will be that the chosen broker-dealers will serve as mere conduits for the tightly controlled entities. The Commission=s proposal will, in effect, encourage compliant rather than independent market making in this market segment. Accommodating broker-dealers will be less than forthcoming than their competitors in offering insight or information for fear of losing the franchise of quoting the tightly controlled entity.

Penny Stock fraud is facilitated by broker-dealers that publish quotations for a security without reviewing any issuer information. Even if they are not participating in the fraud, these other broker-dealers give the security a measure of credibility through their quotations. But the Commission=s proposals have a puzzling remedy: a) allow an issuer to arbitrarily decide to whom information should be provided, thus encouraging accommodating rather than independent market making, or b) allow an issuer to refuse to disclose information necessary to create or maintain an independent market. From a regulatory perspective it seems an invitation to disaster to place the power to influence an independent market solely in the hands of the issuer. This aspect alone could well undermine investor confidence in the integrity of the market.

Under present Rule 15c2-11(f)(3) broker-dealers are exempted from the information requirements when any market-maker publishes in an interdealer quotation system a quotation for a covered OTC security that has been the subject of regular and frequent quotations. The exemption requires that the security must have been the subject of quotations on at least 12 business days during the previous 30 calendar days, with no more than 4 consecutive business days elapsing without a quotation. Piggybacking should be retained as a device to discourage the beknighting of broker-dealers by issuers.

The Commission should exempt non-Penny Stock, tightly controlled entities from the non-piggyback provision. The exemption must not, however, be drafted to permit an issuer to arrogate to itself the right to withhold financials in order to prevent the development of independent market making. Looking at proposed Rule 15c2-11(d)(6) for guidance, it basically specifies the information that broker-dealers must obtain and review for non-reporting issuers. The rule requires background data involving the identification of the entity, specific descriptions of its classes of securities, amounts outstanding and issuable, and the holders of record. 15c2-11(d)(xi) and (xiv) offer three alternatives concerning disclosures pertaining to executives, directors, and other control persons= five year history of criminal convictions and legal/regulatory actions; and issuer disclosures pertaining to two years of control changes, increase in equities, mergers, acquisitions, bankruptcy, and delisting. The alternative steps in complying with the proposal are:

1. provide the substantive descriptions required;

2. the issuer prepares a statement advising that none of the reportable incidents occurred, or

3. the broker-dealer prepares a statement of steps taken by it to obtain the information and a declaration that the issuer failed or refused to provide the information.

I would urge the Commission to adapt the third option offered above, i.e., demonstration of good faith efforts to obtain information in response to a refusal to so provide, to situations involving a non-disclosing tightly controlled entity. I believe it would be preferable under this limited circumstance for a broker-dealer to demonstrate attempted compliance by forwarding a written demand for information to a tightly controlled entity, and, following the issuer=s refusal to respond after a period of time (perhaps 5 business days), the broker-dealer would then send notification to the issuer that in accordance with the exemptive provision of 15c2-11, the broker-dealer now intends to make an independent market. The broker-dealer would be permitted to make a market provided it retains a copy of its written request, proof of service, and a copy of its notice of non-receipt of the requested information. Similarly, if any broker-dealer is provided sufficient information by a tightly controlled entity, then any other broker-dealer should be permitted to piggyback.

The proposals expand the information that broker-dealers must review before publishing a quotation for a non-reporting issuer's securities and to make that information more readily available to the marketplace. The proposal requires a broker-dealer to obtain and review information regarding each class of the non-reporting issuer's outstanding securities; including the number of securities outstanding, the number of securities issuable upon exercise or conversion of outstanding derivative securities of the issuer, and the total number of security holders of record as of the end of the issuer's most recent fiscal year (or a more recent rate date if the date is available).This enhanced information requirement would presumably indicate to the broker-dealer whether any persons had access to large quantities of securities that could dilute the value of the public float, but, again, a tightly controlled entity=s raison d=etre is to control the float, so this amendment merely rewards those companies that decline to provide information.

It would also be appropriate for the Commission to foster development of central repositories of information about issuers that are not participating in its public disclosure system, but the Commission should not become involved in the development of an in-house technology to be financed at public expense. Using existing technology in the private sector, we can develop repositories of information that would be easily accessible by the Internet, telephone, or mail. I would urge the Commission to encourage the development of independent repositories, much like branch libraries, and for all such repositories to be accessible from a centralized index at the Commission=s website. Further, the Commission should require that all requisite materials must be available seven days a week, 24 hours a day at the independent repositories= websites, or may be ordered during business hours during workdays pursuant to telephone inquiries (or by regular mail request). The independent repositories should be required to charge no more than a reasonable fee and to timely satisfy all requests and, if they develop a record of noncompliance, should be decertified from participating in the repository program.

The Kohler Company, which manufacturers plumbing supplies and gasoline engines, was founded by John Michael Kohler 125 years ago, and is one of the nation=s largest family/closely-held firms. Kohler Co. had 1997 earnings of $88 million [$11,594 per share] on $2.21 billion in sales, with paid dividends of $900 per share. In 1978 Chairman Herbert V. Kohler, Jr. engineered a 20-for-1 reverse split of Kohler stock, which had the effect of forcing a number of non-family shareholders to sell out at $412.50 per share.

On April 7, 1998, the Milwaukee Journal Sentinel published an article by Avrum D. Lank entitled AKohler Plans to Shut Door on Outsiders,@ by Avrum D. Lank. The article disclosed that AKohler Co. is offering to buy out any stockholder at $52,700 a share -- about half the recent price in open market transactions -- as part of a complicated financial plan aimed at keeping the company forever private and under the control of current Chairman Herbert V. Kohler Jr. and his descendants.@ The company hired an independent appraiser, Willamette Management Associates, which set the $52,700 price as the offer to non-family members. However, the article advises that Asix shares of Kohler stock traded on the open market at $135,000 each, according to a quotation provided by Bloomberg News. Bloomberg also reported that on March 23, 189 shares traded at $101,000 each.@ The publicly traded shares were sold by individual family members in the past. According to the proxy statement, 300 shares, or 4% of the company=s outstanding stock is owned by non-Kohler family members.

Similarly, in an article in the April 7, 1998 edition of the Wall Street Journal entitled AHead of Kohler Family Unveils Plan to Buy Out Holders of Fixtures Firm,@ by Scott Kilman, the restructuring plan is described as having Aupset some of his [Herbert V. Kohler, Jr.] more distant relatives enough for them to hire legal counsel.@ The Wall Street Journal quoted Natalie A. Black, Kohler general counsel and wife of Chairman Herbert V. Kohler, Jr. as admitting that Aif you=re a nonfamily member, you will be cashed out.@ More to the point, the article noted that the cash-out

The broker-dealers that usually make markets in tightly controlled entities often refer to themselves as making markets in Athinly traded@ stocks. Quotes may be one-sided (based upon anecdotal information estimates are placed at 10 to 15% of the time), but more likely than not, the market is two-sided with quotes maintained on a consistent basis. Market makers in thinly traded stocks respond to inquiries from institutions, minority shareholders, and, from the tightly controlled entities themselves. Again, based solely upon anecdotal information, this market may normally consist of a dozen or so firms making markets in 100 to 300 securities, with about 150 core issues quoted on a consistent basis. The economics of this market are driven by arbitrage opportunities, solicitations/indications from clients, or as a Aplay@ during times of perceived mergers and acquisitions. The benefit derived from this market is a vibrant, independent alternative to the arbitrary, self-serving valuation of tightly controlled entities.

This letter does not seek to question the propriety of tightly controlled entities, or to call into question the time-honored tradition of family-run or closely-held businesses. To the contrary, as evidenced by the superlative performance of many companies in this sector, those entities continues to flourish in the global, technological environment. Nonetheless, the Commission=s proposed 15c2-11 proposals fail to adequately recognize the stratification in the OTCBB/NQB sector between Penny Stocks and tightly controlled entities. The proposals are far too simplistic in this aspect and have the potential to undermine a significant system of checks and balances that benefits the public and offers some refuge to oppressed minority shareholders.

Sincerely,

Bill Singer,

Singer Frumento Sichenzia LLP
40 Exchange Place -20th Floor-
N.Y., NY 10128
212-809-8550
bsinger@singerfru.com